Chapter 12 Mergers and Acquisitions as Vehicles

1. Chapter 12Mergers and Acquisitions as Vehicles 0

2. LEARNING OBJECTIVES • 1. Know the difference between a merger and an acquisition. • 2. Know why mergers and acquisitions occur. • 3. Explain the role of due diligence when performing a merger or • acquisition. • 4. Identify the ten main terms considered when structuring a deal and • describe why they matter. • 5. Explain what an integration manager does. • 6. Describe the six major areas to look for leverage when integrating • operations of two companies. • 7. Discuss the characteristics of acquisitions in different industry contexts.

3. Introduction - MERGER VS. ACQUISITION A B C The consolidation or combinationof two or more companies Merger + A B A One company acquires another through stock purchase or exchange Acquisition + The “merger”of Daimler with Chrysleris considered by manyto have been an acquisitionin disguise

4. Introduction • WHY MERGERS AND ACQUISITIONS HAPPEN • Mergers and acquisitions are motivated by the same reasons • that motivate alliances such as joint ventures and contractual • arrangements. • Additional value created by an M&A derived from synergies • due to increased revenue and decreased cost that come • from combination of the two companies.

5. Introduction • M&As allow company to grow the business faster than is • possible with organic growth. • M&As attractive when management unable to negotiate a • contract in which benefits exceed costs of the business • relationship, management feels need for greater control over • operations, and management seeks to control risk exposure.

6. Introduction • Personal factors can enter into an M&A decision, such as • opportunistic behaviour by top executives. • Increasing size of company can increase personal • compensation and enhance personal power. • Executive’s employment risk is reduced.

7. Introduction • Why Mergers and Acquisitions Fail? • 1. poor strategic rationale • 2. a mismatch of cultures • 3. difficulties communicating and leading the • organization poorly • 4. integration planning and execution • 5. paying too much for the target company.

8. The Merger & Acquisition Process • 1. IDENTIFYING CANDIDATES • The strategic rationale for using M&As informs what is wanted in the potential candidates. • Setting up criteria on this basis means that the targets will fit the strategy and capabilities of the company.

9. The Merger & Acquisition Process • 2. PRELIMINARY TALKS • The few companies that are identified as attractive candidates are approached and asked about their interest in a merger or an acquisition. • The talks can initially involve exploratory talks between chief executive officers about their interest in a possible combination.

10. The Merger & Acquisition Process • 3. ASSESSING FIT OF THE POTENTIAL • CANDIDATE • Having agreed on the possibility of a merger or acquisition, it is time to assess the fit of the targeted company. This includes external and internal analysis. • External analysis involves understanding the driving forces in the macro-environment that will affect the industry and the business in terms of its size, growth, and profitability.

11. The Merger & Acquisition Process • Internal analysis involves learning enough about the other party so that the potential deal can be appropriately valued, the representations and warranties of the other side tested, full disclosure can be made to investors, and post-merger integration can be planned.

12. The Merger & Acquisition Process • 4. NEGOTIATING TERMS • When the two sides are sufficiently in agreement over the general terms of the deal, they may commit their understanding to a term sheet and/or a letter of intent. • This confirms the growing level of commitment to the deal and guides lawyers who are drafting the definitive agreement.

13. The Merger & Acquisition Process • Price • Form of Payment • Financing • Timing and Deadlines • Commitments • Control and Governance • Risk Management • Form of the Transaction • Social Issues • Social Welfare and Community Issues

14. The Merger & Acquisition Process • 5. DEAL SIGNING THROUGH APPROVAL • Before the CEOs sign the definitive agreement, a vote by the target’s board of directors and possibly by the buyer’s board as well is required. • If a vote by the shareholders is required, the target’s board can recommend whether they approve the deal.

15. The Merger & Acquisition Process • 6. INTEGRATING THE ACQUISITION • Ideally, planning for integrating the two companies begins while due diligence is being conducted. • At this stage, plans will be general and then specified in greater detail when more information is available after the deal is completed. • Otherwise, the plans will have to be prepared after the deal is completed and this will slow down integration.

16. The Merger & Acquisition Process • Senior management team looks for areas where integration • can lever the performance of the business. There are six • areas that have significant potential: • 1. Customer Strategy and Branding • 2. Capabilities • 3. Corporate Culture • 4. Business Logic • 5. Staffing • 6. Information Technology

17. Acquisition Capability • Companies using M&As as a vehicle for growth • have developed core capabilities that give them • a competitive advantage at this activity. • These capabilities are associated with an • experienced team performing the M&As, a • standard methodology for doing M&As, and • putting an integration manager in charge of • pulling the two companies together after the • deal is completed.

18. Acquisition Capability • Companies that have performed many integration • exercises have learned the value of having • an integration manager. • A special set of skills is required to be an effective • integration manager. The person has to • have a deep knowledge of the acquiring company, • have a flexible managerial style, be comfortable • with chaos, be self-confident, be independently • responsible, and be emotionally and culturally • intelligent.

19. Introduction Growth Maturity M&As tend to be R&D and product-related M&As tend to be for acquiring products that are proven and gaining acceptance M&As primarily for dealing with over capacity in the industry Acquisitions in Different Industry Contexts - M&As AND INDUSTRY LIFE CYCLE

20. Technological change Demographic change Geopolitical change Trade liberalization Deregulation Acquisitions in Different Industry Contexts - M&As IN DYNAMIC CONTEXTS RIM and Open Text both use acquisitions to ensure they maintain their strong competitive positions Recognizing the increasing number of languages and cultures immigrating to Canada, Rogers Communications purchased the multi-cultural channel OMNI 1 in 1986 IBM divested its PC division to a Chinese company as that country emerges Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA BCE, the parent to Bell Canada, was allowed to operate as a monopoly until 1992 when the CRTC opened the doors to long distance competition for the first time in Canada

21. M & As and Coevolution • As with alliances, use of acquisitions in dynamic contexts • fits into coevolution model of corporate strategy. • Coevolution is the orchestration of a web of shifting • linkages among evolving businesses. • Acquisitions can enable a company to absorb the • capabilities of their targets to develop specific dynamic • capabilities in concert with the best resources and • capabilities available on the market.